Avocados, bananas, melons, pineapple

African agricultural land becoming more attractive to investors

In recent years investors have started discovering the potential of agriculture more and more. Especially Africa is interesting to these investors. That’s partly due to the enormous amount of agricultural land available, according to the FAO sub-saharan Africa has 90 million hectares of arable land available. Only 25 percent of this vast acreage is used for agriculture. On the other hand, infrastructure and telecommunications is quickly developing in African countries. Within the fruit cultivation, investors also know how to find the continent more often. Considerable sums of money are invested into the production of profitable products such as avocado, pineapple, mango, melons and bananas.

“It’s difficult to say when this trend started,” says Doug Hawkins from Hardman Agribusiness. The British company advises entrepreneurs and investors in the agrarian sector. From this position, he paints a picture of investors in fruit cultivation in Africa. “Companies such as Sipef and Kakuzi are established names, other projects are more recent. I’d say there’s increasing interest in owning or developing cultivation or processing companies in sub-Sahara Africa.” Various international parties, both quoted on the stock exchange and private companies, have shown an interest in horticulture in Africa through Hardman, and especially West and East Africa are interesting.

Financiers from Europe and Middle EastRalf Schmauder works as an agronomist in Kenya and Ethiopia. He has observed the same trend. “I can only speak for Kenya and Ethiopia, I don’t know much about the other countries,” he says. “It mostly concerns Italian investors in dairy products. Additionally, Italians, Dutch people, Russians, German people, Indians and Israelis are investing in the cultivation of herbs.” The nut cultivation is also an attractive sector, especially the production of cashew and macadamia nuts. Fewer investors invested in the ornamental plant cultivation in recent years, although existing companies are growing. “The investments in herbs started about four to five years ago,” Ralf says. The exchange rate also plays its part. In 2006, investors still received 87 to 90 Kenyan shilling for 1 euro. Nowadays the exchange rate is 115 to 118 shilling per euro.

The investors can be divided into two groups: companies with knowledge of the fruit cultivation and investors who have little or no knowledge of the fruit cultivation. “Investors without the know-how usually approach existing companies, consultants or agronomists,” Ralf says. “Other investors, who are more knowledgeable, send their own people.” The investors generally come from European, North African and Middle Eastern countries.

Legislation in Kenya makes it easier to investThere are three ways to invest in the cultivation of fruit: starting your own company, taking over a company, or just investing money. In the first case the investor is in control of everything, and they start a company with the help of local people. The exact rules vary per country, but Ralf paints a picture of the situation in Kenya. “That mostly happens if you want to bring your own production to, for example, Kenya, and you want to be sure the project reaches its goal,” he explains. The Kenyan government has adjusted the rules, so that this investing procedure has become simpler. “A local person isn’t necessary anymore to start or establish a company. In the past, you needed at least a manager from that country. Investors from abroad have to prove they invest at least 100.000 USD before the company can be registered. It’s advisable to register the company via a law firm.”

Leasing of arable land is allowed, but registered. Foreign investors cannot buy arable land in Kenya without involvement of local people. After a certain time, the land can be taken over. “This automatically requires long-term planning, budgeting and strategy.” A quicker way is an investment or acquisition of a company. “When you’re convinced the existing company will do everything to reach your goal, that becomes an option,” Ralf says. For example, the investor can function as a cost centre to expand the assortment or adjust an existing product to the wishes of the investor.

Low-risk and long-termThe third case is hardly ever used, Ralf knows. The risks are much too large. “NGOs and subsidy suppliers often work that way, but they’re not investors.” In general, he sees investors in horticulture want to run as few risks as possible. “The word risk plays an important part. I know of investors who don’t like taking risks, but when you’re working with natural products, the cultivation plays its part in addition to the market situation. Anything can happen.”

Considering the nature of fruit cultivation, the investors generally aren’t parties interested in a quick profit. For avocados, for example, it takes three years before the first harvest can be picked. “I think it rarely happens in horticulture that investors are only interested in profit,” Ralf explains. “You see that much more in real estate or trade industries.” Doug adds that because of the land laws in most African countries, investors should develop a supply chain. In other countries the land card always pays out.

Investments in Africa and the Middle East definitely come at a risk, something that doesn’t comfort most investors. To reduce the risk, it’s important to arrange as much as possible through law firms and to enter into clear agreements. “It does appear as if we’re getting more and more stability,” Ralf says, “laws have been tightened.”

Export to Europe and Middle EastThe focus of investors in fruit cultivation projects is on countries such as Kenya, Tanzania, Ghana, Ivory Coast, Senegal, Sierra Leone, Guinea, Zimbabwe and Burkina Faso. On product level, the cultivations of profitable products can expect a cash injection. “Avocado, mango, banana, pineapple, melon, pomegranate and macadamia,” Doug sums up several crops that are invested in. Ralf has also noticed considerable investments are made in the cultivation of herbs, and there’s interest in the blueberry cultivation in East Africa, although it’ll take quite some doing before the first berries can be harvested.

“Investors always look at markets that have room for a certain product,” Ralf explains the focus of investors on export markets. Europe and the Middle East are relatively nearby destinations for the fruit. “There are also companies that are looking into the possibility to move production to Africa, because production costs are lower there,” Ralf explains. Because of the economic growth in Africa, several countries on the continent are a good market as well.

Opportunities for Kenyan exotics and soft fruit“We are mostly working on starting projects in the cultivation of herbs,” Ralf continues. “Among other things, there’s a greenhouse with hydroponic cultivation, especially NFT (Nutrient Film Technique, a water-based cultivation system). As a newcomer, you have to do everything to get started on the market. You therefore have to be distinctive from the others.” In Ghana, West Africa, an Italian investor started a hydroponic cultivation of salads, baby leaves and some herbs. Where most investors focus on export markets outside Africa, this project is focussed on the high-end market in Accra, the Ghanaian capital.

Major existing growers in Kenya have permanent customers, new companies therefore also have to build up a new clientele. That can be done by being distinctive in quality or value added, among other things. “Major growers are generally not interested in small deliveries to many customers, it’s too much work for them. The organisations are set up to supply in bulk to a limited clientele.” However, some existing companies are also investing in hydroponic cultivation, fertilisers, water and the irregular climate.

“Kenya still has many opportunities for investors,” Ralf mentions. New products he thinks have potential are herbs and soft fruit, but also more exotic products like baobab or moringa. In the past three years, hundreds of millions of euros have been invested in these cultivations, he estimates. Recently, an Israeli company invested 12 million euro in the hydroponic cultivation of basil. “They naturally already have a market for herbs.” It’s an advantage that Kenya has no real summers and winters. “The commercial cultivation is completely based on irrigation, so that cultivations can also be switched from outside to inside, and from open field to hydro.” There’s much demand for the cultivation of herbs, but there’s also competition from, for example, Israel and South America. However, Kenya has as the advantage that arable land is easily available and agriculture has tax benefits or exemptions.